Current financial reporting, governance, and risk management topics
On May 24, 2018, President Donald Trump signed the Economic Growth, Regulatory Relief, and Consumer Protection Act.
Provisions of the legislation, which largely amends portions of the Dodd-Frank Wall Street Reform and Consumer Protection Act, include:
Federal financial regulators will now begin working to implement various provisions of the legislation and incorporating the changes into their supervisory processes. However, the full impact of these regulatory relief efforts is not likely to be realized until financial services companies have a few cycles of examinations completed with their primary regulators. To better understand how these regulatory changes will affect their institutions, banks and credit unions are encouraged to maintain close communication with their respective regulators.
The Federal Deposit Insurance Corp. (FDIC) issued, on May 22, 2018, its “Quarterly Banking Profile,” covering the first quarter of 2018. According to the report, FDIC-insured commercial banks and savings institutions earned $56 billion in the first quarter of 2018, an increase of $12.1 billion (27.5 percent) from a year earlier. The driving factors in the increase in net income were higher net operating revenue and a lower effective tax rate from the 2017 tax reform law, partially offset by higher loan-loss provisions and noninterest expense.
The report provides these additional first-quarter statistics:
At the end of the first quarter, there were 5,607 FDIC-insured commercial banks and savings institutions, a decline from 5,670 the year before. During the quarter, 65 institutions were acquired, three new charters were added, and there were no failures. The number of institutions on the FDIC’s problem bank list declined from 95 to 92.
On June 6, 2018, the National Credit Union Administration (NCUA) reported quarterly figures for federally insured credit unions based on call report data submitted to and compiled by the agency for the first quarter of 2018. Here are some highlights:
On June 1, 2018, the NCUA announced changes to the member business lending rule to conform with changes to the Federal Credit Union Act incorporated into the Economic Growth, Regulatory Relief, and Consumer Protection Act, which was signed into law on May 24. Among other changes, federally insured credit union loans made on any one- to four-unit family dwellings no longer will count as member business loans, and so will not count toward the aggregate member business loan cap imposed on each federally insured credit union.
The NCUA board also approved the removal of the members’ occupancy requirement for loans secured by liens on one- to four-unit family dwellings, as previously dwellings of that size were required to be a member’s primary residence to be excluded.
The final rule became effective on June 5.
On June 18, 2018, the Office of the Comptroller of the Currency (OCC) announced Sydney Menefee will be its next deputy comptroller and chief accountant. Menefee will lead the OCC’s bank accounting and financial reporting efforts, providing accounting counsel to examiners, the banking industry, and the accounting profession. She will assume these duties at the end of July, upon the retirement of Rusty Thompson.
On May 24, 2018, the OCC issued its “Semiannual Risk Perspective” for spring 2018, which focuses on issues that pose threats to OCC-regulated financial institutions and lists risk themes for the federal banking system based on data as of March 31, 2018. These include credit, operational, compliance, and interest rate risks. The report presents information in the areas of operating environment, bank performance, special topics in emerging risk, trends in key risks, and supervisory actions.
The report suggests the following related to the risk themes:
The OCC, on May 23, 2018, issued Bulletin 2018-14, “Core Lending Principles for Short-Term, Small-Dollar Installment Lending,” as a reminder to banks of the core lending principles for managing the risks associated with offering short-term, small-dollar installment lending programs. Consistent with the OCC’s support for responsible innovation by banks to meet the evolving needs of consumers, businesses, and communities, the OCC encourages banks to offer these loans; however, banks should understand the core lending principles and should review plans with their OCC portfolio manager, examiner, or supervisor before implementing such plans.
According to Bulletin 2018-14, banks should develop and implement these programs consistent with sound risk management practices and align the programs with their overall business plans and strategies. Examples of such strategies may include working with consumers who are able to repay a loan despite having a credit profile that is outside of a bank’s typical underwriting standards.
The Board of Governors of the Federal Reserve System (the Fed), the OCC, the FDIC, the Securities and Exchange Commission (SEC), and the Commodity Futures Trading Commission, on May 30, 2018, approved for public comment a comprehensive proposed rule to simplify and tailor Volcker rule compliance requirements. The rule generally prohibits banking entities from engaging in proprietary trading and from owning or controlling hedge funds or private equity funds.
Banking entities subject to the Volcker rule since its December 2013 implementation have found it to be complex, creating compliance uncertainty. The proposed amendments would simplify the rule by removing or modifying requirements that are not deemed necessary for effective implementation.
Developed by the regulators, the changes encompass the following areas:
Changes to the Volcker rule provisions made by the recently enacted Economic Growth, Regulatory Reform, and Consumer Protection Act include exempting community banks – those with total consolidated assets less than $10 billion and with total trading assets and liabilities that are not more than 5 percent of total consolidated assets – from the Volcker rule restrictions.
Comments on the proposal will be accepted until 60 days after publication in the Federal Register.
On May 24, 2018, the U.S. Senate voted 69-24 to confirm Jelena McWilliams as chair of the FDIC. She previously served as chief counsel and deputy staff director for the Senate Banking Committee, and as counsel to the Senate Small Business Committee. Most recently, McWilliams was executive vice president and general counsel at regional Cincinnati-based Fifth Third Bank. She will replace Chairman Martin Gruenberg, who has led the regulatory agency since 2011. McWilliams will serve a five-year term.
On May 11, 2018, the Federal Financial Institutions Examination Council (FFIEC), which consists of the Fed, the FDIC, the OCC, the NCUA, and the Consumer Financial Protection Bureau, issued new exam procedures for the Financial Crimes Enforcement Network’s (FinCEN) final rule from 2016, “Customer Due Diligence Requirements for Financial Institutions.” The 2016 rule, which became effective May 11, 2018, clarifies customer due diligence requirements. It also requires covered financial institutions to identify and verify the identity of beneficial owners of certain legal entity customers. The FFIEC’s announcement includes overview and examination procedures for customer due diligence and also for beneficial ownership for legal entity customers.
On a related matter, on May 16, 2018, FinCEN issued an administrative ruling that temporarily suspends the application of the beneficial ownership requirements for certificate of deposit rollovers and loans that renew automatically. This exception, retroactive to the rule’s May 11, 2018, effective date, will expire on Aug. 9, 2018. During the temporary suspension, FinCEN will make a determination about additional exceptive relief and whether it should be given for such financial products and services that were established before May 11, 2018, but are expected to roll over or renew after that date.
The Transition Resource Group (TRG) for Credit Losses met on June 11, 2018, to discuss the following additional implementation issues for the credit losses standard:
The TRG largely agreed with the FASB staff recommendations. The conclusions will be memorialized in a TRG memo.
At its meeting on June 7, 2018, the Emerging Issues Task Force (EITF) voted to issue a final consensus on Issue 17-A, “Customer’s Accounting for Implementation, Setup, and Other Upfront Costs (Implementation Costs) Incurred in a Cloud Computing Arrangement That Is Considered a Service Contract.” Consistent with the proposal, the accounting for implementation costs for CCAs that are service contracts will align with the requirements in ASC Subtopic 350-40 for internal-use software by capitalizing implementation costs during the development stage and amortizing those costs over the term of the hosting arrangement. Amortization of the capitalized implementation costs will be presented in the same income statement line item as hosting arrangement fees. Capitalized implementation costs will be presented in the same line items on the balance sheet and the cash flow statement as hosting arrangement fees.
Once issued, the final standard, which could be early adopted, will be effective for public business entities in fiscal years beginning after Dec. 15, 2019, and interim periods within those years. For all other entities it will be effective for years beginning after Dec. 15, 2020, and interim periods within fiscal years beginning after Dec. 15, 2021.
In SEC Chair Jay Clayton’s address in New York on June 18, 2018, he shared several ideas related to corporate culture at financial institutions and the SEC:
The SEC, on June 4, 2018, named Valerie A. Szczepanik as the senior adviser for digital assets and innovation for Division of Corporation Finance (Corp Fin) Director Bill Hinman. This new position was created to focus on emerging digital asset technologies and innovations, including initial coin offerings and cryptocurrencies, and coordinate work across the SEC on these matters. Most recently, Szczepanik was an assistant director in the Division of Enforcement’s Cyber Unit.
On June 4, 2018, President Trump nominated Elad L. Roisman to be a commissioner of the SEC for a five-year term. Roisman would replace outgoing Commissioner Michael Piwowar, who announced his resignation in May.
On May 31, 2018, the SEC announced that Julie A. Erhardt has been named as the acting chief risk officer as the SEC searches to fill this newly created position. Erhardt joined the SEC in 2004 as a deputy chief accountant in the Office of the Chief Accountant, and she continues to hold that position.
On June 6, 2018, in London, Chief Accountant Wesley Bricker addressed the Institute of Chartered Accountants in England and Wales. He covered the following topics:
PCAOB Chairman William Duhnke, on May 17, 2018, addressed the University of Kansas Auditing Symposium, where he discussed the first-ever request for public comment on the PCAOB’s strategic plan and covered principles that will guide the board’s actions and decisions. He shared a number of items that the board is considering in order to improve audit quality through inspections, as well as improving the reporting and communicating inspection results. The chairman also discussed approaches by audit regulators in other countries that could inform the board’s views.
Before closing, he posed a number of questions that the board must consider as it evaluates improvements to its programs that go beyond the inspections program.
The PCAOB’s SAG met June 5-6, 2018, in Washington, D.C. The SAG comprises various stakeholders – investors, auditors, audit committee members, public company executives, and others – and advises the PCAOB on audit and professional practice matters.
Meeting topics included the following:
The PCAOB announced, on May 22, 2018, that Chief Auditor Martin F. Baumann would leave the board after 12 years of service. The PCAOB also announced on May 18, 2018, that Director of Registration and Inspections Helen Munter would leave after 14 years of service. These departures were effective at the end of May 2018. Finally, on May 29, 2018, the PCAOB announced that Director of Enforcement and Investigations Claudius Modesti would leave the agency after 14 years of service.
On May 22, 2018, the CAQ released highlights from its SEC Regulations Committee meeting held on March 13, 2018, with SEC staff. At the meeting, the SEC’s Corp Fin staff provided a staffing update for Corp Fin’s Office of the Chief Accountant (Corp Fin OCA).
Financial reporting updates discussed at the meeting included:
To expand on information in the CAQ’s March 2018 report, “Non-GAAP Measures: A Roadmap for Audit Committees,” the Anti-Fraud Collaboration is hosting a free Continuing Professional Education webcast, “Non-GAAP Measures – What Do They Say About Fraud Risk?,” on July 18, 2018, at 1 p.m. Eastern. CAQ Executive Director Cindy Fornelli will moderate the panel discussion on how to deter fraud and misconduct in the development and presentation of non-GAAP measures.
On May 11, 2018, the Internal Audit Foundation published a report, “Auditing Anti-Bribery Programs,” on the integral role that internal audit has in anti-bribery programs. The report highlights components of strict anti-bribery programs, auditing techniques, and global organizations’ anti-bribery initiatives.